Markets are on edge as US trade talks with China hit a rough patch

By Stephen Bartholomeusz

The unease that permeated markets on Tuesday reflects a sense among investors that the trade negotiations between the US and China aren’t going quite as smoothly as the Trump administration might have led them to believe.

There was a shudder on Wall Street in response to a Bloomberg report that China was “pushing back” against some of the US demands.

An indication that the talks, now at their pointy end, aren’t progressing quite as envisaged is that the new deadline for a deal supposed to have been finalised this month is now loosely being targeted for the end of next month.

Donald Trump needs a trade deal as much as China. Credit: AP

The apparent sticking points are the obvious ones: the enforcement mechanism for ensuring China complies with the terms of the agreement; the strength of the protections for US intellectual property; reduced state subsidies for Chinese industry and, should a deal be struck, the rate at which existing US tariffs on $US250 billion ($353 billion) of China’s exports to America will be removed.

The enforcement mechanism is, perhaps, the big one. The US wants a very one-sided deal, giving itself the option to unilaterally impose fresh tariffs on China’s exports if China doesn’t, in its view, meet its commitments. The US version of the agreement would preclude any retaliatory response from China.

Similarly, the US wants the right to determine the rate at which it removes the existing tariffs. China would, obviously, want them removed as quickly as possible once an agreement has been signed.

It is difficult to see how, or why, China would agree to such one-sided outcomes.

Investors are sensitive to the perceived progress of the negotiations. The Dow Jones index tumbled 100 points in response to the Bloomberg report, although the market subsequently retraced its fall.

Sharemarkets have been a good guide to the progress of the trade talks.

After the plunge in markets over the last few months of 2020 the US stock market has bounced back about 13 per cent so far this year as the January 1 deadline Donald Trump had set for China’s capitulation was initially extended to March 1, and then became indeterminate as progress appeared to be occurring.

Success barometer

Trump himself appears to be acutely aware of the sensitivity of the negotiations for equity markets, which he has regarded as a barometer of his own successes, or failures, and of his prospects of re-election in 2020.

He has predicted a “very big spike” in the market if the trade negotiations result in a deal, although it would appear the market has already priced in a largely successful outcome. The market’s definition of success – any deal that ends the conflict – might, of course, be different to that of Trump’s harder-line trade advisers.

US trade representative Robert Lighthizer (right) and Treasury Secretary Steve Mnuchin. They may not get what they wished for. Credit: Bloomberg

The reason the market’s bottom line might be different to Trump’s, and more particularly to advisers like his trade representative, Robert Lighthizer, or Treasury Secretary Steve Mnuchin, was well captured in an analysis of the impacts of a continuing trade war by Rhodium Group and the US Chamber of Commerce released in the US late last week.

In broad terms, it concluded that an escalation of the conflict would cost China’s economy more than it would cost the US economy, but the damage to the US economy would still be very substantial.

Mutually assured destruction

It estimated that China’s GDP would be between 0.8 per cent and 1.2 per cent lower and the US economy between 0.7 per cent and 0.9 per cent lower by 2025 than without a continuation of the conflict. Over a decade, the cost to the US economy would be about $US1 trillion.

That undermines the Trump assertion that trade wars are good and easy to win. While China might be the bigger loser, the US would also lose, and lose “bigly” from continuing the trade war. It’s mutually assured destruction.

Further, hardest hit by a continuation of the dispute would be those manufacturing sectors, like the information and communications technology sector, which rely on lower-cost parts shipped from China. The analysis said 49 per cent of imports from China are intermediate goods – semi-finished goods where the final stage of manufacturing occurs in the US by companies.

That illustrates the global nature of the supply chains that lie below the trade data, and also how that data can produce a one-dimensional view of where the value in trade relationships is really created.

A failure to get some agreement in this round of negotiations, even if not a clear “victory” for the US, will be damaging for markets and Trump’s own re-election prospects, given that the hardest hit regions within the US from the conflict so far provided the foundations for Trump’s unexpected victory in 2020.

That conclusion is behind the market’s optimism that a deal will be struck, regardless of whether China agrees to the more aggressive demands of the US negotiators.

Trump wants and needs a deal and the ability to be able to proclaim that his negotiating skills have produced a victory, even if the actual substance of the deal is less than the way in which he is likely to characterise it. It would seem reasonable to assume that China, too, understands that.

Stocks, oil prices edge up on trade talk optimism

NEW YORK (Reuters) – Oil prices and a gauge of global stock markets edged higher on Tuesday, lifted by fresh record highs on Wall Street after U.S. President Donald Trump said the United States and China were close to agreeing on the first phase of a trade deal.

Investor sentiment took heart in a steady patter of encouraging news about the prolonged trade talks, providing hope the on-again, off-again talks after 16 months of negotiations appeared to be drawing nearer to conclusion.

Trump said Washington was in the “final throes” of work on a deal that would defuse the trade war with Beijing, but he also underscored Washington’s support for protesters in Hong Kong, a potential sore point with China.

China’s Commerce Ministry earlier said Chinese and U.S. trade negotiators held a phone call to hammer out a “phase one” deal, leading U.S. and euro zone bond yields to slide as investors saw progress being made.

MSCI’s gauge of stocks across the globe .MIWD00000PUS gained 0.14%, as the global benchmark traded within half a percentage point of an all-time high set in January 2020.

Equity markets have rallied on hopes of a deal, but traders are anxious to know what the reaction might be once a deal is reached, said Dennis Dick, a proprietary trader at Bright Trading LLC in Las Vegas.

“Traders are starting to book some profits and just get cautious. Cautious optimism is driving us higher right now,” he said.

The pan-European STOXX 600 index closed up 0.1% with the French CAC 40 .FCHI up 0.08% and Germany’s DAX .GDAXI closing down by 0.08%.

MSCI’s emerging markets index .MSCIEF fell 0.43%.

All three major indexes on Wall Street set record intraday and closing highs, as gains for Disney and Best Buy overshadowed some softer-than-anticipated economic data.

The Dow Jones Industrial Average .DJI rose 55.21 points, or 0.2%, to 28,121.68. The S&P 500 .SPX gained 6.88 points, or 0.22%, to 3,140.52 and the Nasdaq Composite .IXIC added 15.45 points, or 0.18%, to 8,647.93.

For the first time in more than a year the spread on investment-grade credit default swaps, as measured by the CDX IG index, fell to new lows in a sign of optimism about the future, said Bespoke Investment Group LLC in Harrison, New York.

“New lows for credit spreads have served to confirm strong up-trends in equities over the course of this bull market,” Bespoke said in a note.

Oil prices traded higher, helped by predictions for a draw on U.S. crude stockpiles.

“The positive effect this is having on the oil price is more psychological in nature,” said Commerzbank analyst Carsten Fritsch. He noted that he does not expect oil demand to pick up noticeably even after any partial agreement is signed.

U.S. crude stockpiles were expected to have declined 300,000 barrels last week, according to a Reuters poll of analysts, ahead of reports from the American Petroleum Institute on Tuesday and the Energy Information Administration on Wednesday.

Data showed the U.S. goods trade deficit fell sharply in October as both exports and imports declined, pointing to a continued reduction in trade flows that has been blamed on the Trump administration’s “America First” policy.

U.S. consumer confidence fell for a fourth straight month in November while other data showed an unexpected drop in newhome sales last month.

The dollar index .DXY fell 0.09%, with the euro EUR= up 0.11% to $1.1025. The Japanese yen JPY= weakened 0.11% versus the greenback at 109.05 per dollar.

Benchmark 10-year U.S. Treasury notes US10YT=RR rose 7/32 in price to push their yield down to 1.7380%.

Gold edged higher, snapping a four-day losing streak, after touching a two-week low earlier in the session at $1,450.30 an ounce.

U.S. gold futures for December GCcv1 delivery settled up 0.2% at $1,460.30.

“The only story here is the China-U.S. (trade deal). Last few sessions, gold has been selling off on hopes for a U.S.-China deal. Right now, gold is paused here and is in kind of a wait-and-see (mode),” said Bob Haberkorn, senior market strategist at RJO Futures.

World stocks edge higher ahead of trade talks, Brexit

NEW YORK (Reuters) – Stock markets globally inched higher on Monday after China struck an upbeat tone as trade talks between the United States and Beijing resumed, though worries remained over the fate of Brexit.

On Wall Street, the Dow Jones Industrial Average fell 53.22 points, or 0.21 percent, to 25,053.11, the S&P 500 gained 1.92 points, or 0.07 percent, to 2,709.8 and the Nasdaq Composite added 9.71 points, or 0.13 percent, to 7,307.91.

European markets closed higher, with the benchmark Stoxx 6000 index gaining 0.8 percent, while Chinese shares rose more than 1 percent on the first day of trading after the week-long Lunar New Year holiday. MSCI’s gauge of stocks across the globe gained 0.03 percent.

Worries about a slowdown in global growth, the U.S.-China trade dispute and the possibility of another U.S. government shutdown have been foremost on investors’ minds. At the same time, Britain is due to leave the European Union in six weeks, though it still has no exit plan in place. Data on Monday showed the British economy grew last year at its slowest since 2020.

“The risk remains that investors are unwilling to commit to a breakout until we see what emerges from U.S.-China trade negotiations and Brexit,” said John Hardy, head of FX strategy at Saxo Bank.

China expressed hopes for a trade breakthrough as talks between the world’s two largest economies resumed, though a U.S. Navy mission through the disputed South China Sea cast a shadow over the prospect for improved Beijing-Washington ties.

The two sides are trying to come up with a deal before March 1, when U.S. tariffs on $200 billion worth of Chinese imports are scheduled to increase to 25 percent from 10 percent.

Safe-haven bonds and the dollar have gained amid the prolonged uncertainty. The dollar reached its highest in six weeks against a basket of other currencies, rising for an eighth consecutive day as investors piled into the greenback.

The yield on Germany’s 10-year Bund, considered the risk-free benchmark for the region, held close to 0.10 percent after touching 0.077 percent on Friday, its lowest since October 2020. The European Commission downgraded its euro zone growth forecasts last week.

U.S. benchmark 10-year notes last fell 7/32 in price to yield 2.6554 percent, compared with 2.63 percent late on Friday.

A collapse in border protection talks between U.S. Democratic and Republican lawmakers raised fears of another government shutdown.

“Trade talks and shutdown (worries) are really weighing on markets,” said Sebastian Fellechner, rates strategist at DZ Bank. “We don’t see any major movements because of the general and global uncertainty.”

The rising threat to growth means equity markets will focus on earnings from major U.S. companies for clues about the path of consumer shares. These include Coca-Cola Co, PepsiCo Inc, Walmart Inc, Home Depot Inc, Macy’s Inc and Gap Inc.

Analysts now expect first-quarter earnings for S&P 500 companies to decline 0.1 percent from a year earlier. That would be the first such quarterly profit decline since 2020, according to IBES data from Refinitiv.

Oil prices slipped on concern about slowing global demand and a pick-up in U.S. drilling activity.

U.S. crude was 0.6 percent lower at $52.40 per barrel. Brent was 1 percent lower at $61.48.